More worker benefits of doubtful benefit

Every 1st of May the day of the worker is celebrated in many parts of the world, and in Bolivia it has become a custom for the government to give certain benefits to the workers on that day. This year was not the exception and the government promulgated 5 Supreme Decrees benefiting workers. The highlight of these 5 Decrees is Decree 1107 because it recognizes the labor rights for the provisional workers of the companies. That is to say, those workers that are under short-term contract will be able to receive social benefits.

Reviewing the history of the labor legislation in Bolivia, I found that the General Law of Labor that is still in effect today, was approved in 1939 and upgraded to a rank of law in 1942. The first regulations were enacted in 1943 and since then there have been lots of modifications, exceptions and amplifications to the law with the sole consequence of complicating the interpretation and application of the law.

For instance, according to Jemio (2000) (1), in 1982 there were 500 laws and 2500 regulations affecting directly or indirectly this law. Certainly, the labor legislation and even the social legislation have significantly increased the labor costs. In Bolivia, labor costs are affected by the minimum wage, government pressures over the private sector, taxes, bonus payments, overtime, payment for night work and for holydays, sick leave, compensations, among other payments. The reaction of employers to these regulations has been, first to evade most of these payments (informality or pseudo informality) and second, to employ less workers than what they actually need contributing in this manner to a higher level of unemployment.

Lately I have been doing some research about informality and I have come out with the conclusion that informality in Bolivia has had a “grease in the wheal effect” by relaxing the labor rigidities that all of the regulations mentioned above have imposed during all these years. Most of the micro and small firms operate under informality and this has enabled them to work under a scheme of complete labor flexibility, which has allowed them also to subsist in the market. For instance, one of the most common practices in many of these companies is the piecework or payment by product. Lazear (2000) (2), shows that piecework payment contributes to labor flexibility and to the increase in productivity in firms. In Bolivia, it has allowed small and micro firms not to increase productivity, but to have the same levels of productivity as large and medium firms, because they are hit from fewer distortions that misallocate resources among these firms.

Furthermore, by using the definition of what is understood by Formal Company, I state that not even the companies that are considered formal satisfy all the requirements of the formality. In Bolivia, for a company to be considered formal, first it has to be registered at the National Trade Register, currently being administrated by FUNDEMPRESA, second it has to be registered before the Tax Authority and third before the Ministry of Labor. In addition, its employees must be affiliated to Social Security, meaning affiliation to any of the Pension Funds Administrators (AFP’s) and to the Public Health Maintenance Organization (HMO). It is estimated that less than 1 percent of formal companies in the manufacturing industry meet all these requirements.
So where do I want to arrive with this article? I just want to show that all of the reforms that have been done in the labor market in Bolivia will not have the desired effect if there is not a major change beginning with the General Law of Employment. Informality and pseudo formality have been the answer of many firms to subsist, but it is certainly not the way firms could grow and compete in external markets. The internal market in Bolivia is very small, so only by expanding the external markets can firms reach economies of scale and develop into sustainable firms. And this will be the only way Bolivia would be able to begin a real and always hoped for productive transformation.

It is time to think seriously about the labor market under a macro, but also under a micro perspective, which is certainly not an easy task, but at least we should begin by having quarterly data on labor, so some serious research can be performed.

How does informality affect Bolivia’s economy and its potential? Leave your reply below.

 (*) Researcher, Institute for Advanced Development Studies, La Paz, Bolivia. The author happily receives comments at the following e-mail: cmachicado@inesad.edu.bo.
(1) Jemio, Luis Carlos (2000) “Reformas, Crecimiento, Progreso Técnico y Empleo en Bolivia”, en Quince Años de Reformas Estructurales en Bolivia: Sus impactos sobre Inversión, Crecimiento y Equidad, Jemio y Antelo (editores), CEPAL – IISEC, La Paz – Bolivia.
(2) Lazear, Edward (2000) “Performance and Productivity,” American Economic Review, Vol.90, No.5, pp.1346-1361.